SEC plans SAR44bn capex

Saudi Electricity Company (SEC) and plans capital spending of about 44 billion Saudi riyals annually over the next five years, Fitch Ratings revealed on Wednesday.

A statement sent by the global ratings agency to Emirates 24l7 said that SEC has spent approximately SAR30bn annually in capital expenditure over the past three.

Fitch anticipates that the massive capital spending programme will put pressure on credit metrics and it will be critical for the financial viability of the company and its ratings to receive ongoing state aid, especially since the current electricity tariff structure for residential and certain other customers (representing about 53 per cent of total electricity consumption within the KSA) is deeply discounted.

On Wednesday, it also affirmed SEC Long-term Issuer Default Rating (IDR) and senior unsecured rating at 'AA-'. The Outlook is Stable. Fitch has also affirmed SEC's three Sukuk issues at 'AA-'.

The Saudi government owns directly 74 per cent and 81 per cent including the seven per cent of shares held by Saudi Aramco, a state-owned enterprise. SEC is instrumental in executing the Kingdom's policies on electrification, maintaining a stable and reliable electricity infrastructure, and in providing electricity to domestic consumers at a state-determined tariff that is heavily subsidised. Through its council of ministers, the government is responsible for approving the electricity tariffs that SEC can charge its customers.

Historically, state financial support has been very strong. In 2011, the government approved a 25-year SAR51bn interest-free loan to the company, to be drawn in five annual installments beginning in 2012, to support SEC's SAR219.2bn capex spending program (2012-2016).

SEC received about SAR7.5bn in direct government funding in 2011 as well as the Ministry of Finance assuming an additional SAR27.7bn payable to Saudi Aramco for fuel purchased by SEC through 2009. In 2009, the Saudi government extended the moratorium on dividend distributions by SEC to the state until 2019.

SEC's monopolistic, low-risk, and regulated electricity transmission and distribution business and dominant presence in the electricity generation segment within the Kingdom also support the credit profile. However, rating concerns include execution risk related to SEC's large capex programme, low capacity utilisation rates in the electricity generation segment of the business, high electricity transmission losses, limited visibility in the current cost structure, and lack of clarity around the process to settle future fuel costs with Saudi Aramco.

The recent formation of a wholly owned subsidiary, National Transmission Company (NTC), with plans to transfer the transmission related assets to NTC for equity and debt and with an arrangement to lease the entire system capacity to SEC will be rating neutral.

Fitch calculated funds from operations (FFO) adjusted net leverage is expected to rise to around 7x by 2015, from 2.0x in 2011, assuming that the proposed capital spending programme is completed on time and within budget. This translates into a standalone credit profile that is significantly weaker than the current state support driven rating level.

Fitch assumes that the company will supplement cash flow from operations and already approved government funding with debt to fund its capex programme and to meet debt maturities. Additionally, the company will continue to defer fuel costs payable to Saudi Aramco

The Stable Outlook mirrors that on the KSA. SEC's liquidity is strong. At the end of 2011, it had approximately SAR25.9bn in total liquidity, including SAR7.3bn in cash, with most of the remainder comprising headroom under existing government and commercial facilities. This compares well with around SAR8.1bn in debt maturities in 2012, including SAR5bn in Sukuk bonds.

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